The Federal Reserve is on an unprecedented interest rate hiking binge in their effort to bring down our recent near historically high inflation.  Starting in March 2022, they have rapidly increased the benchmark Fed Funds Rate (FFR) from roughly 0% to 4.5% in eight increments.  The impact of each increase affects the economy with some sort of time lag.  

I’ve heard many opinions on the length of that lag, but each seems determined more by then-current convenience.  For my own purposes, I’ve come up with some ‘test assumptions’ as to that lag.  I have 15% of an increment’s impact comes in 6 months; an additional 50% happens in months 6 to 12; 25% in months 12 to 18 and the last 10% by the 24 month mark.  Again, just my estimates.

The Chart below shows the breakdown of each hike and a quarterly timeline of the degree of impact in that quarter as well as the cumulative impact.

FED RATE HIKES
“TIMING OF IMPACT” MAP
Fed Rate Move	Assumed Percent Impact per Period		Estimated Quarterly Impact
15%	50%	25%	10%
Date of Hike	Amount	6 months	12 months	18 months	24 months		Qtr Ending	Combined Increment	Cumulative
03.17.2022	0.250%	0.038%	0.125%	0.063%	0.025%		Dec ’22	0.225%
05.05.2022	0.500%	0.075%	0.250%	0.125%	0.050%		Mar ’23	0.350%	0.575%
06.16.2022	0.750%	0.113%	0.375%	0.188%	0.075%		Jun ’23	0.813%	1.388%
07.27.2022	0.750%	0.113%	0.375%	0.188%	0.075%		Sep ’23	0.850%	2.238%
09.21.2022	0.750%	0.113%	0.375%	0.188%	0.075%		Dec ’23	0.938%	3.176%
11.02.2022	0.750%	0.113%	0.375%	0.188%	0.075%		Mar ’24	0.500%	3.676%
12.14.2022	0.500%	0.075%	0.250%	0.125%	0.050%		Jun ’24	0.525%	4.201%
02.01.2023	0.250%	0.038%	0.125%	0.063%	0.025%		Sep ’24	0.150%	4.351%
							Dec ’24	0.125%	4.476%
TOTALS	4.500%	0.675%	2.250%	1.125%	0.450%		Mar ’25	0.025%	4.501%

(My assumptions may be off, but let’s say they’re not real far off the mark.)

Looking at the timeline, we are just feeling the first .25% increase and part of the 05.05.2022 .50% hike.  At the end of 1Q23, the cumulative impact of the hikes is only projected to be .575%.  That leaves just around 85%+ of the effects yet to come over the next two years.

Policy Decisions Are Data-Based

Data Points measure historical things, and Policy sets future things in motion.  The data currently tells us that inflation in the Goods sector of the economy is definitely cooling.  In the Services sector, not so much.  Demand for labor remains significantly higher than supply in most Service sectors and is, therefore, driving up labor costs.  The higher costs bring higher prices, or inflation.  The Fed isolates this pressure on pricing via the so-called ‘SuperCore Inflation’ number, which strips out pretty much everything but the labor item in the monthly headline number.  

As good as that may be, it still uses historical data when at this point in the rate cycle 85% of the impact from actions thus far are yet to be felt.  It seems time for the Fed to take a breather and let the seeds they’ve planted grow for a couple months this Spring.  Let’s see if fertilizer, (It’s another rate hike to further slow the economy, but just go with the metaphor here.  Thanx. KJR.) is necessary this Summer, giving time for the historical data to cover some ground on our previous hikes.